Quiz 4 Mistakes to Avoid
These are some of the most tempting mistakes in the Quiz 4 material. Try to explain what is wrong before opening each card.
Recording Bad Debt Expense when a specific customer's account is written off Tap to reveal the fix
Under the allowance method, Bad Debt Expense was recorded earlier when uncollectible accounts were estimated.
The write-off entry is:
Debit Allowance for Doubtful Accounts
Credit Accounts Receivable
No new expense is recorded at the time of the write-off.
Treating Allowance for Doubtful Accounts as a liability Tap to reveal the fix
Allowance for Doubtful Accounts is a contra-asset.
It reduces Accounts Receivable to the amount the company realistically expects to collect.
Assuming a write-off reduces Net Accounts Receivable Tap to reveal the fix
A write-off reduces both Accounts Receivable and the Allowance by the same amount.
Because both decrease equally, Net Accounts Receivable does not change.
Using the same calculation for percentage of sales and aging of receivables Tap to reveal the fix
These methods have different targets.
Percentage of sales estimates Bad Debt Expense.
Aging or percentage of receivables estimates the desired ending balance in Allowance for Doubtful Accounts.
Ignoring the existing Allowance balance when using the aging method Tap to reveal the fix
Aging gives you the desired ending Allowance balance.
You must compare that amount with the Allowance's current balance to determine the required adjustment.
Recording revenue when a previously written-off account is recovered Tap to reveal the fix
A recovery does not create new revenue.
First reinstate the receivable. Then record the cash collection. The original revenue was recorded when the sale occurred.
Using the full annual interest rate on a note outstanding for only part of a year Tap to reveal the fix
The stated interest rate is an annual rate.
Always use:
Principal × Annual Rate × Time
Time must represent the fraction of the year the note is outstanding.
Assuming a higher receivables turnover is automatically better Tap to reveal the fix
Higher turnover generally means faster collection, but ratios need context.
Compare the result with prior periods, the company's credit policy, and industry expectations before deciding whether it is good or bad.
Capitalizing every cost related to a long-lived asset Tap to reveal the fix
Capitalize costs necessary to acquire the asset and prepare it for its intended use.
Ordinary operating costs and routine maintenance are generally expensed.
Depreciating land Tap to reveal the fix
Land is generally not depreciated because it normally has an indefinite useful life.
Thinking depreciation measures the decline in an asset's market value Tap to reveal the fix
Depreciation is a cost-allocation process.
It allocates historical cost over periods of use. It is not an attempt to report current market value.
Crediting the Equipment account when recording depreciation Tap to reveal the fix
The asset remains recorded at its original historical cost.
The depreciation entry credits Accumulated Depreciation, not the asset account itself.
Subtracting residual value before calculating double-declining-balance depreciation Tap to reveal the fix
Double-declining-balance depreciation is based on beginning book value × the DDB rate.
Residual value is not subtracted first. Instead, it acts as a floor so the asset is not depreciated below residual value.
Comparing cash proceeds with original cost when calculating a gain or loss on disposal Tap to reveal the fix
Compare the cash proceeds with the asset's book value on the disposal date.
Book Value = Cost − Accumulated Depreciation
Proceeds above book value create a gain. Proceeds below book value create a loss.
Forgetting to update depreciation before selling an asset during the year Tap to reveal the fix
If an asset is sold between normal reporting dates, record depreciation through the disposal date first.
Only then can you determine the correct book value and gain or loss.
Removing the asset but leaving Accumulated Depreciation on the books when an asset is sold Tap to reveal the fix
A complete disposal removes both:
the asset's original cost
AND
its related Accumulated Depreciation
The entry also records cash and any resulting gain or loss.
Amortizing every intangible asset Tap to reveal the fix
Finite-life intangibles are amortized over their useful lives.
Indefinite-life intangibles, such as goodwill, are not regularly amortized. They are evaluated for impairment.
Treating an impairment loss as a liability Tap to reveal the fix
An impairment reduces the carrying amount of the asset and recognizes a loss.
It reduces assets, net income, and equity. It does not create a liability.